MNI INTERVIEW: Switzerland Should Adopt Crawling Peg-Lengwiler

--SNB Should Adopt Crawling Peg, Target Lower Franc, Lengwiler Says

By Luke Heighton

     FRANKFURT(MNI) - The Swiss National Bank should gradually lower the value

of the franc against a basket of currencies by using a system such as a crawling

peg in order to push inflation closer to target over the coming years, a senior

Swiss economist told MNI.

     Under a crawling peg, the SNB would guarantee that the CHF would weaken by

a fixed percentage each year, Yvan Lengwiler said, noting that while such a

stance could force the SNB to buy large amounts of foreign currency, its control

of its balance sheet was already limited under its current policy of FX

intervention.

     "This would make investing in CHF highly undesirable and interest rates

would increase. The SNB could, however, keep interest rates low, which would be

inflationary. It would follow this strategy, until inflation has reached the

target," the professor of economics at the University of Basel and vice

president of the City of Basel pension fund's investment committee said in a

telephone interview.

     --LIMITED ROOM FOR CUTS

     The room for further interest rate reductions is limited, despite Chairman

Thomas Jordan's assertions that there remains room to cut rates if necessary,

Lengwiler said.

     The interest rate channel is "probably exhausted or close to it. If it

would lower the rates more, physical cash would increasingly become dominant

over bank accounts," he said, adding that the SNB would hesitate to take

unpopular steps aimed at making withdrawing cash more difficult, such as

withdrawing large denomination notes.

     Inflation is not expected to reach positive territory until 2022, according

to SNB forecasts, and Lengwiler suggested the bank should replace its price

objective of 0-2% with a symmetrical 2% target, while stating publicly that

anything lower is unacceptable. Had it done so sooner, he argued, "nominal

interest rates would be higher and the SNB would still have room to manoeuvre."

     Lengwiler spoke to MNI days after the SNB's June monetary policy assessment

that saw it hold the policy rate at 0.75%, while leaving unchanged the exemption

threshold above which commercial banks must pay negative interest on central

bank deposits. The latter could be increased, Lengwiler said, "but they should

also be clear in saying what this is for - making it easier for banks to make

money."

     --SNB POLICY REVIEW

     A strategic review of the SNB's monetary policy was "desirable," Lengwiler

said, given that the current approach has been in place for more than a decade.

The bank could also be more open in its communications, allowing greater insight

into its decision-making mechanisms, for instance by publishing word-for-word

minutes, with a sizeable time lag.

     Challenges facing the bank include what appears to be "extremely sluggish"

growth in production, as indicated by electricity use data, which suggest "a

disconnect between consumption and production." A surge in projected

seasonally-adjusted unemployment to around 6.2% is also a negative indicator,

said Lengwiler, who served on the Swiss Financial Market Supervisory Authority's

board of directors until 2019.

     He expressed concern that Swiss authorities may be reopening their economy

before hard evidence that the coronavirus epidemic is under control. He was also

puzzled by the giddy recovery in equity markets.

     "I'm not sure their jubilation will persist. Maybe there is some optimism

there that is unjustified," he said.

     While official Swiss loans to firms hit by the Covid-19 emergency have

helped reduce bankruptcies, Lengwiler said companies might find themselves too

heavily burdened by the debt, which will be counted as liabilities for the

purpose of computing solvency from March 2021. The government should consider

whether loans could be forgiven or transformed into equity stakes under

well-defined circumstances, he said.

     Swiss banks are generally much better capitalised than before the great

financial crisis, but whether this will be sufficient is "not so clear. If the

Covid crisis were to turn into a real estate crisis then there would be several

banks in real trouble. It's not very likely this will happen, but it is a

possibility."

     The economy may also face other long-term challenges, he noted, pointing to

the danger that Switzerland's strong pharmaceutical sector may face new

competition if other countries determine the industry to be strategic and

nationalise some production. Brexit also has knock-on effects for Switzerland's

relationship with the European Union.

     "What we've seen is that the EU is behaving much more rigidly since it is

in the Brexit process when dealing with Switzerland," he explained, "when it

also has a much more important negotiation with the UK and the two could affect

one another."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MT$$$$,MX$$$$]